MEDICAL PROPERTIES TRUST, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 2)
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-32559
Medical Properties Trust, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Maryland
(State or Other Jurisdiction of Incorporation or Organization)
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20-0191742
(IRS Employer Identification No.) |
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1000 Urban Center Drive, Suite 501
Birmingham, AL
(Address of Principal Executive Offices)
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35242
(Zip Code) |
(205) 969-3755
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common Stock, par value $0.001 per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer
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reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of shares of the Registrant’s common stock, par value $0.001 per
share (“Common Stock”), held by non-affiliates of the Registrant as of June 30, 2007 was
approximately $655,917,760. For purposes of the foregoing calculation only, all directors and
executive officers of the Registrant have been deemed affiliates.
As of March 13, 2008, 53,710,574 shares of the Registrant’s Common Stock were outstanding.
Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on May 22, 2008 are incorporated by reference into Part III, Items 10 through 14 of this
Annual Report on Form 10-K.
MEDICAL PROPERTIES TRUST, INC.
AMENDMENT No. 2 TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
This
Amendment No. 2 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2007
of Medical Properties Trust, Inc. is filed for the sole purpose of adding the consolidated
financial statements of Prime Healthcare Services, Inc. and
subsidiaries (“Prime”) as Exhibit 99.1. At
December 31, 2007, our properties leased to Prime were more than 20% of our assets. Since these
properties are leased to Prime under long-term, triple-net leases that transfer substantially all
operating costs to Prime, financial information about Prime may be relevant to investors. The
audited financial statements of Prime for the years ended
December 31, 2007 and 2006 are attached to this
report as Exhibit 99.1. These financial statements were provided to us by Prime and Medical
Properties Trust, Inc. did not participate in their preparation or review.
Table of Contents
PART IV
2
PART IV
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Item 15. |
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Exhibits and Financial Statement Schedules. |
(a) Financial Statements and Financial Statement Schedules
The financial statements and financial statement schedules were previously filed with the Annual
Report on Form 10-K for the fiscal year ended December 31, 2007, filed on March 14, 2008.
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INDEX TO EXHIBITS
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Exhibit |
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Number |
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Exhibit Title |
3.1(1)
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Registrant’s Second Articles of Amendment and Restatement |
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3.2(2)
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Registrant’s Amended and Restated Bylaws |
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3.3(3)
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Articles of Amendment of Registrant’s Second Articles of Amendment and Restatement |
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4.1(1)
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Form of Common Stock Certificate |
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4.2(4)
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Indenture, dated July 14, 2006, among Registrant, MPT Operating Partnership, L.P. and the Wilmington Trust
Company, as trustee |
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4.3(5)
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Indenture, dated November 6, 2006, among Registrant, MPT Operating Partnership, L.P. and the Wilmington
Trust Company, as trustee |
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4.4(5)
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Registration Rights Agreement among Registrant, MPT Operating Partnership, L.P. and UBS Securities LLC and
J.P. Morgan Securities Inc., as representatives of the initial purchasers, dated as of November 6, 2006 |
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10.1(11)
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Second Amended and Restated Agreement of Limited Partnership of MPT Operating Partnership, L.P. |
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10.2(6)
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Amended and Restated 2004 Equity Incentive Plan |
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10.3(7)
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Form of Stock Option Award |
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10.4(7)
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Form of Restricted Stock Award |
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10.5(7)
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Form of Deferred Stock Unit Award |
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10.6(1)
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Employment Agreement between Registrant and Edward K. Aldag, Jr., dated September 10, 2003 |
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10.7(1)
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First Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated March 8, 2004 |
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10.8(1)
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Employment Agreement between Registrant and R. Steven Hamner, dated September 10, 2003 |
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10.9(1)
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Amended and Restated Employment Agreement between Registrant and William G. McKenzie, dated September 10,
2003 |
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10.10(1)
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Employment Agreement between Registrant and Emmett E. McLean, dated September 10, 2003 |
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10.11(1)
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Employment Agreement between Registrant and Michael G. Stewart, dated April 28, 2005 |
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10.12(1)
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Form of Indemnification Agreement between Registrant and executive officers and directors |
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10.13(8)
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Credit Agreement dated October 27, 2005, among MPT Operating Partnership, L.P., as borrower, and Merrill
Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc., as Administrative Agent and
Lender, and Additional Lenders from Time to Time a Party thereto |
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10.14(1)
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Third Amended and Restated Lease Agreement between 1300 Campbell Lane, LLC and 1300 Campbell Lane Operating
Company, LLC, dated December 20, 2004 |
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10.15(1)
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First Amendment to Third Amended and Restated Lease Agreement between 1300 Campbell Lane, LLC and 1300
Campbell Lane Operating Company, LLC, dated December 31, 2004 |
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10.16(1)
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Second Amended and Restated Lease Agreement between 92 Brick Road, LLC and 92 Brick Road, Operating Company,
LLC, dated December 20, 2004 |
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10.17(1)
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First Amendment to Second Amended and Restated Lease Agreement between 92 Brick Road, LLC and 92 Brick Road,
Operating Company, LLC, dated December 31, 2004 |
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10.18(1)
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Ground Lease Agreement between West Jersey Health System and West Jersey/Mediplex Rehabilitation Limited
Partnership, dated July 15, 1993 |
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10.19(1)
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Third Amended and Restated Lease Agreement between San Joaquin Health Care Associates Limited Partnership
and 7173 North Sharon Avenue Operating Company, LLC, dated December 20, 2004 |
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10.20(1)
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First Amendment to Third Amended and Restated Lease Agreement between San Joaquin Health Care Associates
Limited Partnership and 7173 North Sharon Avenue Operating Company, LLC, dated December 31, 2004 |
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Exhibit |
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Exhibit Title |
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10.21(1)
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Second Amended and Restated Lease Agreement between 8451 Pearl Street, LLC and 8451 Pearl Street Operating
Company, LLC, dated December 20, 2004 |
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10.22(1)
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First Amendment to Second Amended and Restated Lease Agreement between 8451 Pearl Street, LLC and 8451 Pearl
Street Operating Company, LLC, dated December 31, 2004 |
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10.23(1)
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Second Amended and Restated Lease Agreement between 4499 Acushnet Avenue, LLC and 4499 Acushnet Avenue
Operating Company, LLC, dated December 20, 2004 |
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10.24(1)
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First Amendment to Second Amended and Restated Lease Agreement between 4499 Acushnet Avenue, LLC and 4499
Acushnet Avenue Operating Company, LLC, dated December 31, 2004 |
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10.25(1)
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Purchase and Sale Agreement among MPT Operating Partnership, L.P., MPT of Bucks County Hospital, L.P., Bucks
County Oncoplastic Institute, LLC, Jerome S. Tannenbaum, M.D., M. Stephen Harrison and DSI Facility
Development, LLC, dated March 3, 2005 |
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10.26(1)
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Amendment to Purchase and Sale Agreement among MPT Operating Partnership, L.P., MPT of Bucks County
Hospital, L.P., Bucks County Oncoplastic Institute, LLC, DSI Facility Development, LLC, Jerome S.
Tannenbaum, M.D., M. Stephen Harrison and G. Patrick Maxwell, M.D., dated April 29, 2005 |
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10.27(1)
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Lease Agreement between Bucks County Oncoplastic Institute, LLC and MPT of Bucks County, L.P., dated
September 16, 2005 |
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10.28(1)
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Development Agreement among DSI Facility Development, LLC, Bucks County Oncoplastic Institute, LLC and MPT
of Bucks County, L.P., dated September 16, 2005 |
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10.29(1)
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Funding Agreement among DSI Facility Development, LLC, Bucks County Oncoplastic Institute, LLC and MPT of
Bucks County, L.P., dated September 16, 2005 |
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10.30(1)
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Purchase and Sale Agreement between MPT of North Cypress, L.P. and North Cypress Medical Center Operating
Company, Ltd., dated as of June 1, 2005 |
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10.31(1)
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Contract for Purchase and Sale of Real Property between North Cypress Property Holdings, Ltd. and MPT of
North Cypress, L.P., dated as of June 1, 2005 |
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10.32(1)
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Sublease Agreement between MPT of North Cypress, L.P. and North Cypress Medical Center Operating Company,
Ltd., dated as of June 1, 2005 |
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10.33(1)
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Net Ground Lease between North Cypress Property Holdings, Ltd. and MPT of North Cypress, L.P., dated as of
June 1, 2005 |
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10.34(1)
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Lease Agreement between MPT of North Cypress, L.P. and North Cypress Medical Center Operating Company, Ltd.,
dated as of June 1, 2005 |
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10.35(1)
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Net Ground Lease between Northern Healthcare Land Ventures, Ltd. and MPT of North Cypress, L.P., dated as of
June 1, 2005 |
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10.36(1)
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Construction Loan Agreement between North Cypress Medical Center Operating Company, Ltd. and MPT Finance
Company, LLC, dated June 1, 2005 |
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10.37(1)
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Purchase, Sale and Loan Agreement among MPT Operating Partnership, L.P., MPT of Covington, LLC, MPT of
Denham Springs, LLC, Covington Healthcare Properties, L.L.C., Denham Springs Healthcare Properties, L.L.C.,
Gulf States Long Term Acute Care of Covington, L.L.C. and Gulf States Long Term Acute Care of Denham
Springs, L.L.C., dated June 9, 2005 |
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10.38(1)
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Lease Agreement between MPT of Covington, LLC and Gulf States Long Term Acute Care of Covington, L.L.C.,
dated June 9, 2005 |
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10.39(1)
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Promissory Note made by Denham Springs Healthcare Properties, L.L.C. in favor of MPT of Denham Springs, LLC,
dated June 9, 2005 |
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10.40(1)
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Purchase and Sale Agreement among MPT Operating Partnership, L.P., MPT of Redding, LLC, Vibra Healthcare,
LLC and Northern California Rehabilitation Hospital, LLC, dated June 30, 2005 |
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10.41(1)
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Lease Agreement between Northern California Rehabilitation Hospital, LLC and MPT of Redding, LLC, dated June
30, 2005 |
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Exhibit |
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Number |
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Exhibit Title |
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10.42(1)
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Amendment No. 1 to Ground Lease Agreement between National Medical Specialty Hospital of Redding, Inc. and
Ocadian Care Centers, Inc., dated November 29, 2001 |
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10.43(1)
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Purchase and Sale Agreement among MPT Operating Partnership, L.P., MPT of Bloomington, LLC, Southern Indiana
Medical Park II, LLC and Monroe Hospital, LLC, dated October 7, 2005 |
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10.44(1)
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Lease Agreement between Monroe Hospital, LLC and MPT of Bloomington, LLC, dated October 7, 2005 |
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10.45(1)
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Development Agreement among Monroe Hospital, LLC, Monroe Hospital Development, LLC and MPT of Bloomington,
LLC, dated October 7, 2005 |
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10.46(1)
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Funding Agreement between Monroe Hospital, LLC and MPT of Bloomington, LLC, dated October 7, 2005 |
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10.47(1)
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Purchase and Sale Agreement among MPT Operating Partnership, L.P., MPT of Chino, LLC, Prime Healthcare
Services, LLC, Veritas Health Services, Inc., Prime Healthcare Services, Inc., Desert Valley Hospital, Inc.
and Desert Valley Medical Group, Inc., dated November 30, 2005 |
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10.48(1)
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Lease Agreement among Veritas Health Services, Inc., Prime Healthcare Services, LLC and MPT of Chino, LLC,
dated November 30, 2005 |
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10.49(1)
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Purchase and Sale Agreement among MPT Operating Partnership, L.P., MPT of Sherman Oaks, LLC, Prime A
Investments, L.L.C., Prime Healthcare Services II, LLC, Prime Healthcare Services, Inc., Desert Valley
Medical Group, Inc. and Desert Valley Hospital, Inc., dated December 30, 2005 |
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10.50(1)
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Lease Agreement between MPT of Sherman Oaks, LLC and Prime Healthcare Services II, LLC, dated December 30,
2005 |
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10.51(9)
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Forward Sale Agreement between Registrant and UBS AG, London Branch, dated February 22, 2007 |
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10.52(9)
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Forward Sale Agreement between Registrant and Wachovia Bank, National Association, dated February 22, 2007 |
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10.53(11)
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Form of Medical Properties Trust, Inc. 2007 Multi-Year Incentive Plan Award Agreement (LTIP Units) |
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10.54(11)
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Form of Medical Properties Trust, Inc. 2007 Multi-Year Incentive Plan Award Agreement (Restricted Shares) |
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10.55(12)
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Term Loan Credit Agreement among Medical Properties Trust, Inc., MPT Operating Partnership, L.P., as
Borrower, the Several Lenders from Time to Time Parties Thereto, KeyBank National Association, as
Syndication Agent, and JP Morgan Chase Bank, N.A. as Administrative Agent, with J.P. Morgan Securities Inc.
and KeyBank National Association, as Joint Lead Arrangers and Bookrunners |
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10.56(10)
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First Amendment to Term Loan Agreement |
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10.57(13)
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Revolving Credit and Term Loan Agreement, dated November 30, 2007, among Medical Properties Trust, Inc., MPT
Operating Partnership, L.P., as Borrower, the Several Lenders from Time to Time Parties Thereto, KeyBank
National Association, as Syndication Agent, and JPMorgan Chase Bank, N.A. as Administrative Agent, with J.P.
Morgan Securities Inc. and KeyBank National Association, as Joint Lead Arrangers and Bookrunners |
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10.58(13)
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Second Amendment to Employment Agreement between Registrant and Edward K. Aldag, Jr., dated September 29,
2006 |
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10.59(13)
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First Amendment to Employment Agreement between Registrant and R. Steven Hamner, dated September 29, 2006 |
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10.60(13)
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First Amendment to Employment Agreement between Registrant and William G. McKenzie, dated September 29, 2006 |
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10.61(13)
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First Amendment to Employment Agreement between Registrant and Emmett E. McLean, dated September 29, 2006 |
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10.62(13)
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First Amendment to Employment Agreement between Registrant and Michael G. Stewart, dated September 29, 2006 |
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10.63(8)
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Second Amended and Restated 2004 Equity Incentive Plan |
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21.1(13)
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Subsidiaries of Registrant |
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23.1(13)
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Consent of KPMG LLP |
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23.2
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Consent of Moss Adams LLP |
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
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32(13)
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 |
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Exhibit |
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Number |
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Exhibit Title |
99.1(14)
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Consolidated Financial Statements
of Prime Healthcare Services, Inc. as of December 31, 2007 and
2006 |
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Incorporated by reference to Registrant’s Registration Statement on Form S-11 filed with the Commission on October
26, 2004, as amended (File No. 333-119957). |
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Incorporated by reference to Registrant’s quarterly report on Form 10-Q for the quarter ended June 30, 2005, filed
with the Commission on July 26, 2005. |
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Incorporated by reference to Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2005,
filed with the Commission on November 10, 2005. |
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Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on July 20, 2006. |
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Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on November 13, 2006. |
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Incorporated by reference to Registrant’s definitive proxy statement on Schedule 14A, filed with the Commission on
September 13, 2005. |
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Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on October 18, 2005. |
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Incorporated by reference to Registrant’s definitive proxy statement on Schedule 14A, filed with the Commission on
April 14, 2007. |
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Incorporated by reference to Registrant’s current report on Form 8-K, filed with the Commission on February 28, 2007. |
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Incorporated by reference to Registrant’s quarterly report on Form 10-Q for the quarter ended September 30, 2007,
filed with the Commission on November 9, 2007. |
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Incorporated by reference to Registrant’s current report
on Form 8-K, filed with the Commission on August 6, 2007. |
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Incorporated by reference to Registrant’s current report
on Form 8-K, filed with the Commission on August 15, 2007. |
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(13) |
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Previously filed as an exhibit to Registrant’s Annual
Report on Form 10-K, filed with the Commission on March 14, 2008. |
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(14) |
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Since affiliates of Prime Healthcare Services, Inc. lease more than 20% of our total assets under triple net leases,
the financial status of Prime may be considered relevant to investors. Prime’s most recently available audited
consolidated financial statements (as of and for the years ended December 31, 2007 and 2006) are attached
as Exhibit 99.1 to this Amendment No. 2 to the Annual Report on Form 10-K. We have not participated in the
preparation of Prime’s financial statements nor do we have the right to dictate the form of any financial statements
provided to us by Prime. |
7
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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MEDICAL PROPERTIES TRUST, INC.
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By: |
/s/ R. Steven Hamner
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R. Steven Hamner |
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Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) |
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Date: July 11, 2008
INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
23.2
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Consent of Moss Adams LLP |
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
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99.1
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Consolidated Financial Statements of Prime Healthcare Services, Inc. as of December 31, 2007 and 2006 |
8
EX-23.2 CONSENT OF MOSS ADAMS LLP
Exhibit 23.2
Consent of Moss Adams LLP,
Independent Public Accounting Firm
The Board of Directors
Prime Healthcare Services, Inc.
We hereby consent to the incorporation by reference in the registration statements (No. 333-130337)
on Form S-8 and (Nos. 333-121883, 333-140433 and 333-141100) on Form S-3 of Medical Properties
Trust, Inc. of our report dated July 2, 2008, relating to the consolidated balance sheets of Prime
Healthcare Services, Inc. and Subsidiaries as of December 31, 2007 and 2006 and the related
consolidated statements of income, stockholders’ equity and cash flows for years then ended, which
report appears in this Annual Report of Medical Properties Trust, Inc. (Form 10-K, Amendment No. 2)
for the year ended December 31, 2007.
/s/ Moss Adams LLP
Irvine, California
July 11, 2008
EX-31.1 SECTION 302, CERTIFICATION OF THE CEO
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF MEDICAL PROPERTIES TRUST, INC.
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward K. Aldag, certify that:
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I have reviewed this annual report on Form 10-K/A of Medical Properties Trust, Inc. |
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2) |
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Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the
period covered by this report. |
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Date: July 11, 2008
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/s/ Edward K. Aldag, Jr.
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Edward K. Aldag, Jr.
Chairman, President and Chief Executive Officer |
EX-31.2 SECTION 302, CERTIFICATION OF THE CFO
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, R. Steven Hamner, certify that:
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I have reviewed this annual report on Form 10-K/A of Medical Properties Trust, Inc. |
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2) |
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Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report. |
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Date: July 11, 2008
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/s/ R. Steven Hamner
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R. Steven Hamner
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Executive Vice President and Chief
Financial Officer |
EX-99.1 CONSOLIDATED FINANCIAL STATEMENTS
Exhibit 99.1
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
INDEPENDENT AUDITOR’S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
CONTENTS
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PAGE |
INDEPENDENT AUDITOR’S REPORT |
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1 |
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CONSOLIDATED FINANCIAL STATEMENTS |
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Consolidated balance sheets |
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2-3 |
Consolidated statements of income |
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4 |
Consolidated statements of stockholders’ equity |
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5 |
Consolidated statements of cash flows |
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6-7 |
Notes to consolidated financial statements |
|
8-32 |
INDEPENDENT AUDITOR’S REPORT
Board of Directors
Prime Healthcare Services, Inc., and Subsidiaries
We have audited the accompanying consolidated balance sheets of Prime Healthcare Services, Inc.,
and Subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of
income, stockholders’ equity, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of Prime Healthcare Services, Inc., and Subsidiaries’
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatements. An audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Prime Healthcare Services, Inc., and
Subsidiaries, as of December 31, 2007 and 2006, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles generally accepted in the
United States of America.
Irvine, California
July 2, 2008
1
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
35,821,948 |
|
|
$ |
13,865,034 |
|
Restricted cash |
|
|
1,081,017 |
|
|
|
— |
|
Patient accounts receivable, net of allowance
for doubtful accounts of $25,305,000 in 2007
and $4,171,000 in 2006 |
|
|
108,867,874 |
|
|
|
53,303,261 |
|
Related party receivables |
|
|
630,007 |
|
|
|
962,235 |
|
Estimated third-party payor settlements |
|
|
915,757 |
|
|
|
— |
|
Supplies inventory |
|
|
3,919,572 |
|
|
|
2,210,747 |
|
Prepaid expenses and other current assets |
|
|
38,888,590 |
|
|
|
27,910,975 |
|
Deposits |
|
|
1,208,256 |
|
|
|
1,881,544 |
|
Income taxes receivable |
|
|
455,169 |
|
|
|
18,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
191,788,190 |
|
|
|
100,152,209 |
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization |
|
|
136,666,473 |
|
|
|
30,972,194 |
|
|
|
|
|
|
|
|
|
|
GOODWILL |
|
|
13,707,803 |
|
|
|
12,316,712 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
250,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
ASSETS OF DISCONTINUED OPERATIONS |
|
|
145,220 |
|
|
|
313,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
342,557,686 |
|
|
$ |
143,754,856 |
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
DECEMBER 31, |
|
|
|
2007 |
|
|
2006 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Bank overdraft |
|
$ |
— |
|
|
$ |
1,159,486 |
|
Accounts payable |
|
|
27,896,703 |
|
|
|
17,373,827 |
|
Accrued expenses |
|
|
47,801,086 |
|
|
|
18,299,594 |
|
Medical claims payable |
|
|
5,828,319 |
|
|
|
3,959,088 |
|
Related party payables |
|
|
9,673,171 |
|
|
|
5,669,785 |
|
Income taxes payable |
|
|
558,622 |
|
|
|
147,000 |
|
Estimated third-party payor settlements |
|
|
— |
|
|
|
2,640,190 |
|
Pre-petition liabilities |
|
|
— |
|
|
|
1,219,450 |
|
Current portion of capital leases |
|
|
2,942,322 |
|
|
|
448,440 |
|
Current portion of long-term debt |
|
|
28,323,213 |
|
|
|
9,093,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
123,023,436 |
|
|
|
60,010,528 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Accrued professional liability reserve |
|
|
45,429 |
|
|
|
2,288,000 |
|
Sale lease-back liability |
|
|
98,000,000 |
|
|
|
— |
|
Capital leases, net of current portion |
|
|
12,236,871 |
|
|
|
695,426 |
|
Long-term debt, net of current portion |
|
|
54,542,420 |
|
|
|
14,734,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
164,824,720 |
|
|
|
17,717,926 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES OF DISCONTINUED OPERATIONS |
|
|
417 |
|
|
|
35,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Common stock, .$01 par value, 3,000 shares
authorized, 100 shares issued and outstanding |
|
|
1 |
|
|
|
1 |
|
Additional paid in capital |
|
|
2,999 |
|
|
|
2,999 |
|
Note receivable from related party |
|
|
(35,762,558 |
) |
|
|
(9,000,000 |
) |
Retained earnings |
|
|
49,089,475 |
|
|
|
43,689,329 |
|
Non-controlling interest |
|
|
41,379,196 |
|
|
|
31,299,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,709,113 |
|
|
|
65,991,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
342,557,686 |
|
|
$ |
143,754,856 |
|
|
|
|
|
|
|
|
See accompanying notes.
3
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, |
|
|
|
2007 |
|
|
2006 |
|
REVENUE |
|
|
|
|
|
|
|
|
Net patient service revenue |
|
$ |
718,642,341 |
|
|
$ |
335,408,330 |
|
Premium revenue |
|
|
27,932,067 |
|
|
|
26,440,384 |
|
Other revenue |
|
|
6,487,393 |
|
|
|
5,505,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
753,061,801 |
|
|
|
367,354,702 |
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
|
301,833,718 |
|
|
|
141,394,865 |
|
Provision for doubtful accounts |
|
|
125,405,390 |
|
|
|
42,162,207 |
|
General and administrative |
|
|
121,226,088 |
|
|
|
73,448,430 |
|
Medical supplies |
|
|
57,162,219 |
|
|
|
29,984,478 |
|
Professional services |
|
|
43,337,880 |
|
|
|
27,194,301 |
|
Depreciation and amortization |
|
|
7,901,078 |
|
|
|
3,553,114 |
|
Medical claims |
|
|
5,209,737 |
|
|
|
1,321,107 |
|
(Gain) on sale of assets |
|
|
(5,486 |
) |
|
|
(9,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
662,070,624 |
|
|
|
319,048,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
90,991,177 |
|
|
|
48,306,139 |
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE, net |
|
|
(5,574,878 |
) |
|
|
(642,039 |
) |
|
|
|
|
|
|
|
|
|
GAIN ON EXTINGUISHMENT OF DEBT |
|
|
— |
|
|
|
104,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES |
|
|
85,416,299 |
|
|
|
47,768,547 |
|
|
|
|
|
|
|
|
|
|
INCOME TAX (BENEFIT) PROVISION |
|
|
1,249,091 |
|
|
|
(2,682,098 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
84,167,208 |
|
|
|
50,450,645 |
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued Apple
Valley Surgery Center (including income on
disposal of $418,140) |
|
|
216,088 |
|
|
|
(377,343 |
) |
Provision for income taxes |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
|
216,088 |
|
|
|
(377,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE ALLOCATION TO
NON-CONTROLLING INTEREST |
|
|
84,383,296 |
|
|
|
50,073,302 |
|
|
|
|
|
|
|
|
|
|
ALLOCATION OF INCOME TO
NON-CONTROLLING INTEREST |
|
|
(69,983,150 |
) |
|
|
(27,052,372 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTROLLING INTEREST IN NET INCOME |
|
$ |
14,400,146 |
|
|
$ |
23,020,930 |
|
|
|
|
|
|
|
|
See accompanying notes.
4
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
Note Receivable |
|
|
Note Receivable |
|
|
Retained |
|
|
Non-controlling |
|
|
|
|
|
|
Shares |
|
|
Stock |
|
|
Paid in Capital |
|
|
from Stockholder |
|
|
from Related Party |
|
|
Earnings |
|
|
Interest |
|
|
Total |
|
BALANCE,
December 31, 2005 |
|
|
30 |
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
22,768,399 |
|
|
$ |
17,746,674 |
|
|
$ |
40,518,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,100,000 |
) |
|
|
— |
|
|
|
(2,100,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable advanced to stockholder |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,000,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling interest in net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
23,020,930 |
|
|
|
— |
|
|
|
23,020,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
in non-controlling interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,000,000 |
|
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to non-controlling interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,500,000 |
) |
|
|
(14,500,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,052,372 |
|
|
|
27,052,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2006 |
|
|
30 |
|
|
|
1 |
|
|
|
2,999 |
|
|
|
(9,000,000 |
) |
|
|
— |
|
|
|
43,689,329 |
|
|
|
31,299,046 |
|
|
|
65,991,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(9,000,000 |
) |
|
|
— |
|
|
|
(9,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable collected from stockholder |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,000,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable proceeds to be received from Prime A |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(35,762,558 |
) |
|
|
— |
|
|
|
— |
|
|
|
(35,762,558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controlling interest in net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14,400,146 |
|
|
|
— |
|
|
|
14,400,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to non-controlling interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(59,903,000 |
) |
|
|
(59,903,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
69,983,150 |
|
|
|
69,983,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2007 |
|
|
30 |
|
|
$ |
1 |
|
|
$ |
2,999 |
|
|
$ |
— |
|
|
$ |
(35,762,558 |
) |
|
$ |
49,089,475 |
|
|
$ |
41,379,196 |
|
|
$ |
54,709,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
PRIME HEALTHCARE SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Controlling interest in net income |
|
$ |
14,400,146 |
|
|
$ |
23,020,930 |
|
Adjustments to reconcile controlling interest in net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
7,901,078 |
|
|
|
3,573,601 |
|
(Gain) on sale of assets |
|
|
(5,486 |
) |
|
|
(9,939 |
) |
Provision for doubtful accounts |
|
|
125,405,390 |
|
|
|
42,161,121 |
|
Gain on extinguishment of debt |
|
|
— |
|
|
|
(104,447 |
) |
Deferred income taxes |
|
|
— |
|
|
|
(2,938,000 |
) |
Non controlling interest in net income |
|
|
69,983,150 |
|
|
|
27,052,372 |
|
Changes in assets and liabilities net of acquisitions: |
|
|
|
|
|
|
|
|
Patient accounts receivable |
|
|
(180,970,003 |
) |
|
|
(74,169,911 |
) |
Supplies inventory |
|
|
(208,825 |
) |
|
|
462,832 |
|
Prepaid expenses and other assets |
|
|
(10,977,615 |
) |
|
|
(17,449,125 |
) |
Deposits |
|
|
673,288 |
|
|
|
253,068 |
|
Due to/ from related parties |
|
|
9,544,179 |
|
|
|
502,158 |
|
Accounts payable |
|
|
10,522,876 |
|
|
|
13,029,721 |
|
Accrued expenses |
|
|
29,501,492 |
|
|
|
5,497,878 |
|
Medical claims payable |
|
|
1,869,231 |
|
|
|
(749,672 |
) |
Income taxes payable/ receivable |
|
|
(25,134 |
) |
|
|
(2,072,728 |
) |
Estimated third-party payor settlements |
|
|
(3,555,947 |
) |
|
|
(2,970,417 |
) |
Pre-petition liabilities |
|
|
(1,219,450 |
) |
|
|
14,540 |
|
Net assets of discontinued operation |
|
|
139,785 |
|
|
|
(278,714 |
) |
Accrued professional liability reserve |
|
|
(2,242,571 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
70,735,584 |
|
|
|
14,825,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(17,008,262 |
) |
|
|
(16,793,910 |
) |
Proceeds from the sale of assets |
|
|
6,812 |
|
|
|
— |
|
Additional purchase price paid to Vanguard Health System
due to working capital adjustment subsequent to acquisition |
|
|
(1,391,091 |
) |
|
|
— |
|
Advances on related party notes receivable |
|
|
(14,300,207 |
) |
|
|
(2,985,048 |
) |
Collection of related party notes receivable |
|
|
5,069,416 |
|
|
|
5,361,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(27,623,332 |
) |
|
|
(14,417,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
(Decrease) increase in bank overdraft |
|
|
(1,159,486 |
) |
|
|
1,159,486 |
|
Net borrowing on line of credit |
|
|
18,452,257 |
|
|
|
9,000,000 |
|
Proceeds from long-term debt borrowing |
|
|
25,242,985 |
|
|
|
5,412,366 |
|
Payments on long term debt |
|
|
(6,182,335 |
) |
|
|
(2,492,542 |
) |
Payments on capital lease obligations |
|
|
(541,094 |
) |
|
|
(572,135 |
) |
Proceeds from related party notes payables |
|
|
39,009,668 |
|
|
|
— |
|
Repayments on related party notes payables |
|
|
(34,993,316 |
) |
|
|
— |
|
Advances on stockholder notes receivable |
|
|
— |
|
|
|
(9,000,000 |
) |
Collection of stockholder’s notes receivable |
|
|
9,000,000 |
|
|
|
— |
|
Proceeds from issuance of common stock in non controlling interest |
|
|
— |
|
|
|
1,000,000 |
|
Distribution to non-controlling interest |
|
|
(59,903,000 |
) |
|
|
(14,500,000 |
) |
Distribution to stockholder |
|
|
(9,000,000 |
) |
|
|
(2,100,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(20,074,321 |
) |
|
|
(12,092,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
23,037,931 |
|
|
|
(11,685,481 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of year |
|
|
13,865,034 |
|
|
|
25,550,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year |
|
$ |
36,902,965 |
|
|
$ |
13,865,034 |
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, |
|
|
|
2007 |
|
|
2006 |
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
7,434,641 |
|
|
$ |
1,148,702 |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
1,128,069 |
|
|
$ |
1,431,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred for the acquisition of property and
equipment |
|
$ |
14,576,421 |
|
|
$ |
643,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable incurred for the acquisition of property and equipment |
|
$ |
— |
|
|
$ |
1,777,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale lease-back liability incurred for the acquisition of PVH (see Note 4) |
|
$ |
28,000,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale lease-back liability incurred for the acquisition of CHMC
(see Note 4) |
|
$ |
55,762,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable proceeds deposited directly with a related party by lender |
|
$ |
35,762,558 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
See accompanying notes.
7
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Nature of Business
Prime Healthcare Services, Inc. (the “Company” or “PHSI”) is a Delaware corporation incorporated on
March 27, 2000. The Company is a holding company whose principal activity is the ownership and
management of its wholly owned subsidiaries:
Desert Valley Hospital, Inc. (“DVH”) is a California S Corporation incorporated on February 13,
1992. DVH operates an 83 bed acute care hospital located in Victorville, California.
Prime Healthcare Services, LLC (“PHS”) is a California LLC formed on April 13, 2004. PHS provides
management and consulting services to CVMC.
Apple Valley Surgery Center Corporation (“AVSC”) is a California S Corporation incorporated on May
1, 1989. AVSC operates an ambulatory surgery center located in Apple Valley, California.
Veritas Health Services, Inc. dba Chino Valley Medical Center (“CVMC”) is a California S
Corporation incorporated on September 22, 2000. CVMC operates a 126 bed acute care hospital
located in Chino California.
Prime Healthcare Services II, LLC dba Sherman Oaks Hospital (“SOH”) is a Delaware LLC formed on
December 2, 2004. SOH operates a 153 bed acute care hospital located in Sherman Oaks, California.
Prime Healthcare Services III, LLC dba Montclair Hospital Medical Center (“MHMC”) is a Delaware LLC
formed on December 2, 2004. MHMC operates a 102 bed acute care hospital located in Montclair
California.
Prime Healthcare Huntington Beach, LLC dba Huntington Beach Hospital (“HBH”) is a Delaware LLC
formed on July 21, 2006. HBH operates a 131 bed acute care hospital located in Huntington Beach,
California.
Prime Healthcare La Palma, LLC dba La Palma Intercommunity Hospital (“LPIH”) is a Delaware LLC
formed on July 21, 2006. LPIH operates a 141 bed acute care hospital located in La Palma,
California.
Prime Healthcare Anaheim, LLC dba West Anaheim Medical Center (“WAMC”) is a Delaware LLC formed on
July 21, 2006. WAMC operates a 219 bed acute care hospital located in Anaheim, California.
Bio-Med Services, Inc. (“BMI”) is a Delaware S Corporation formed on December 14, 2006. BMI
provides asset management services to other PHSI subsidiaries.
Prime Healthcare Paradise Valley, LLC dba Paradise Valley Hospital (“PVH”) is a California LLC
formed on November 6, 2006. PVH operates a 301 bed acute care hospital located in National City,
California.
8
Note 1 — Nature of Business (continued)
Prime Healthcare Centinela, LLC dba Centinela Hospital Medical Center (“CHMC”) is a Delaware LLC
formed on June 26, 2007. CHMC operates a 370 bed acute care hospital located in Inglewood,
California.
Prime Healthcare Anaheim Regional, LLC dba Anaheim Regional Hospital (“PHAR”) is a California LLC
formed on March 13, 2007. PHAR was created for the purpose of acquiring a hospital. As of December
31, 2007 PHAR has not commenced operations.
The Company has a variable interest in Desert Valley Medical Group, Inc. (“DVMG”), Chino Valley
Medical Group, Inc. (“CVMG”), Sherman Oaks Medical Group Management, Inc. (“SOMGM”), Prime
Healthcare Management, Inc. (“PHMI”) and Paradise Valley Medical Group, Inc. (“PVMG”) as defined by
Financial Accounting Standards Board (“FASB”) Financial Interpretation No. 46(R) “Consolidation of
Variable Interest Entities” (FIN 46(R)). PHSI is the primary beneficiary of these variable interest
entities. See basis of consolidation below. DVMG was incorporated as a California professional
corporation in August 1995 and is headquartered in Victorville, California. DVMG has over 60
board-certified primary care and specialty physicians, urgent care/walk-in clinics, on-site
imaging, health education and access to pharmacy, and lab services. DVMG is affiliated with DVH,
which is adjacent to the main campus of DVMG. CVMG was formed in February 2005 to establish a
multi-specialty medical group. As of December 31, 2007 CVMG has not commenced operations. SOMGM
was incorporated as a California professional corporation in October 2005 and is located in Sherman
Oaks, California. PHMI was incorporated on October 18, 2005 as a California corporation and was
formerly known as Prime Management Services, Inc. (“PHSI”). PHMI provides certain management
services to hospitals owned by PHSI. PVMG was incorporated as a California professional corporation
in March 2007 and is headquartered in National City, California.
9
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Organization and Summary of Significant Accounting Policies
Basis of consolidation — The consolidated financial statements include the accounts of PHSI, DVH,
PHS, AVSC, CVMC, SOH, MHMC, HBH, LPIH, WAMC, BMI, PVH, CHMC and PHAR. The consolidated financial
statements also include the accounts of DVMG, CVMG, SOMGM, PHMI and PVMG which the Company has
determined are variable interest entities as defined by FIN 46(R). The equity of the variable
interest
entities have been reflected as a non-controlling interest as of December 31, 2007 and 2006. The
consolidation of these entities does not change any legal ownership, and does not change the assets
or the liabilities and equity of PHSI as a stand-alone entity. However, certain creditors of the
non-controlling interest entity have recourse to the general credit of the Company. All
intercompany accounts and transactions have been eliminated upon consolidation.
Net patient service revenue — Net patient service revenue is reported at the estimated net
realizable amounts from patients, third-party payors, and others for services rendered, including
estimated retroactive adjustments under reimbursement agreements with third-party payors. In some
cases, reimbursement is based on formulas which cannot be determined until cost reports are filed
and audited or otherwise settled by the various programs. Normal estimation differences between
actual payments received for patient services and net patient accounts receivable recorded in
previous years resulted in an increase in net patient service revenue of approximately $15,127,000
and $2,747,000 in the years ended December 31, 2007 and 2006, respectively.
Premium revenue and medical claims expense — The Company has agreements with various Health
Maintenance Organizations (“HMO”) to provide medical services to enrollees. Under these agreements,
the Company receives monthly capitation revenue based on the number of each HMO’s enrollees,
regardless of services actually performed by the Company. Premium revenue under HMO contracts is
recognized during the period in which the Company is obligated to provide services. Certain of the
HMO contracts also contain shared-risk provisions whereby the Company can earn additional incentive
revenue or incur penalties based upon the utilization of inpatient hospital services by assigned
HMO enrollees. The Company records shared-risk revenue and expenses based upon inpatient
utilization on an estimated basis. Differences between estimated shared-risk revenue or expenses
and actual amounts are recorded upon final settlement with each HMO. Amounts due to unaffiliated
health care providers for out of network claims are recognized as incurred. The amounts recorded
are based upon projections of historical developments. Such projections are adjusted and estimates
changed when developments of claims information warrant. Estimation differences are reflected in
medical claims expenses.
10
Note 2 — Organization and Summary of Significant Accounting Policies (continued)
Supplies inventory — Supplies inventory is stated at cost, determined by the average cost method,
which is not in excess of market.
Property and equipment — Property and equipment is stated at cost. Depreciation and amortization
is computed using the straight-line method over the estimated useful lives of the assets, which
range from three to 40 years. Amortization of leasehold improvements is computed over the lesser
of the lease term and the estimated useful lives of the assets and is included in depreciation and
amortization expense.
Use of estimates — The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income taxes — Effective January 1, 2006 PHSI, DVH, AVSC and CVMC, filed an election to convert
corporate status from Sub chapter C corporations to Sub Chapter S of the Internal Revenue Code and
state law. In addition, DVH, AVSC, CVMC and BMI are qualified Q subs of PHSI and are included in
the PHSI consolidated income tax return for the year ended December 31, 2007. In lieu of corporate
income taxes, the stockholders of PHSI will be taxed on their proportionate share of PHSI’s net
income as defined by the Internal Revenue Code. HBH, LPIH, WAMC, MHMC, PHS, SOH, PVH, CHMC and PHAR
are single member LLCs. Their taxable income and loss will be included in the PHSI consolidated
income tax return for the year ended December 31, 2007. PHSI is subject to various state and
franchise taxes. PHSI may disburse funds necessary to satisfy the stockholders’ estimated income
tax liabilities.
DVMG, PHMI, SOMGM, CVMG and PVMG have elected to be taxed under the provision of subchapter S of
the Internal Revenue Code and state law. Under these provisions, the entities do not pay corporate
income taxes on their taxable income. However, the entities are subject to California franchise
taxes. In addition, the stockholders’ of the entities are liable for individual federal and state
income taxes on taxable income. The Company may disburse funds necessary to satisfy the
stockholders’ estimated tax liability.
11
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Organization and Summary of Significant Accounting Policies (continued)
Cash and cash equivalents — The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Goodwill — Management evaluates goodwill, at a minimum, on an annual basis and whenever events and
changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of
goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount,
including goodwill, to the fair value of the reporting unit. The fair values of the reporting units
are estimated using a combination of the income or discounted cash flow approach and market
approach, which uses comparable data. If the carrying amount of the reporting unit exceeds fair
value, goodwill is considered impaired and a second step is performed to measure the amount of
impairment loss, if any.
For the year ended December 31, 2007, the management of the Company determined that an impairment
did not exist. However, if estimates or the related assumptions change in
the future, the Company may be required to record impairment charges to reduce the carrying amount
of this asset.
Fair value of financial instruments — The Company’s consolidated balance sheets include the
following financial instruments: cash and cash equivalents, patient accounts receivable, notes
receivable, accounts payable and accrued liabilities, and long-term liabilities. The Company
considers the carrying amounts of current assets and liabilities in the consolidated balance sheets
to approximate the fair value of these financial instruments and their expected realization. The
carrying amount of notes receivable and long-term debt approximated their fair value, based on
current market rates of instruments of the same risks and maturities.
Recent Accounting Pronouncements — In December 2007, the FASB issued Statement of Financial
Accounting Standard (“SFAS”) No. 141 (revised 2007), “Business Combinations” and SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 141 (revised 2007)
establishes principles and requirements for how an acquirer recognizes and measures the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from
a bargain purchase; and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. In addition,
SFAS No. 141 (revised 2007) requires that direct costs associated with an acquisition be expensed
as incurred. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling
interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. Included
in SFAS No. 160 is the requirement that noncontrolling interests be reported in the equity section
of the balance sheet. These Statements become effective for the Company in fiscal year 2009. SFAS
No. 160 and SFAS No. 141 (revised 2007) are not expected to have a material impact on the Company’s
consolidated financial statements.
12
Note 2 — Organization and Summary of Significant Accounting Policies (continued)
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This Statement defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. The Statement has been subsequently amended by FASB Staff Position No.’s 157-1
and 157-2 to exclude lease classification or measurement (except in certain instances) from the
scope of SFAS No. 157 and to defer the effective date of SFAS No. 157 for most nonfinancial assets
and nonfinancial liabilities. This Statement becomes effective for the Company partially in fiscal
year 2008 and partially in fiscal year 2009. Management has not yet determined if the Statement
will have a material impact on its consolidated financial statements.
In June 2006, the Financial Accounting Standards Board (FASB) issued interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—an interpretation of SFAS No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertain income tax positions accounted for in accordance with SFAS
No. 109. The interpretation stipulates recognition and measurement criteria in addition to
classification, interim period
accounting and significantly expanded disclosure provisions for uncertain tax positions that are
expected to be taken in a company’s income tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2007, our fiscal 2008. FIN 48 is not expected to have a material
impact on the Company’s consolidated financial statements.
Note 3 — Net Patient Service Revenue
The Company has arrangements with third-party payors that provide for payments to the Company at
amounts different from its established rates. A summary of the payment arrangements with major
third-party payors are as follows:
Medicare — Inpatient acute-care services rendered to Medicare program beneficiaries are paid at
prospectively determined rates per discharge. These rates vary according to a patient
classification system that is based on clinical, diagnostic, and other factors. Medicare reimburses
the Company for covered outpatient services rendered to Medicare beneficiaries by way of an
outpatient prospective payment system based on ambulatory payment classifications (“APCs”). The
Company’s classification of patients under the Medicare program and the appropriateness of their
admissions are subject to an independent review.
13
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Net Patient Service Revenue (continued)
Inpatient non-acute services, certain outpatient services, medical education costs, and defined
capital costs related to Medicare beneficiaries are paid based, in part, on a cost reimbursement
methodology. The Company is reimbursed for cost reimbursable items at a tentative rate with final
settlement determined after submission of annual cost reports and audits thereof by the Medicare
fiscal intermediary. The estimated amounts due to or from the program are reviewed and adjusted
annually based on the status of such audits and any subsequent appeals. Differences between final
settlements and amounts accrued in previous years are reported as adjustments to net patient
service revenue in the year examination is substantially completed. These differences increased net
patient service revenue by approximately $439,000 for the year ended December 31, 2007. The Company
does not believe that there are significant credit risks associated with this government agency.
Medi-Cal — Inpatient services rendered to Medi-Cal program beneficiaries are reimbursed under a
contract at a prospectively determined negotiated per diem rate. Outpatient services are
reimbursed based upon prospectively determined fee schedules.
Other — the Company has also entered into agreements with certain commercial insurance carriers,
health maintenance organizations, and preferred provider organizations. The basis for payment to
the Company under these agreements includes
prospectively determined rates per discharge, discounts from established charges and prospectively
determined daily rates.
Laws and regulations governing the third party payor arrangements are extremely complex and subject
to interpretation. As a result, there is at least a reasonable possibility that recorded estimates
will change by a material amount in the near term. The net patient service revenue increased
approximately $15,127,000 and $2,747,000 for the years ended December 31, 2007 and 2006,
respectively due to removal of allowances previously estimated that are no longer necessary.
Note 4 — Acquisitions
During 2007 and 2006, the Company entered into the following acquisitions. All acquisitions have
been accounted for using the purchase method of accounting. Operating results for each of the
acquisitions have been included in the accompanying consolidated financial statements since the
dates of acquisition.
On October 1, 2006 HBH entered into an asset purchase agreement with VHS of Huntington Beach, Inc.
Pursuant to the agreement HBH acquired the operating assets and assumed certain current liabilities
from VHS of Huntington Beach, Inc. The purchase price of $2,048,705 was paid through the assumption
of liabilities. The acquisition expands and compliments the operations of the Company in Orange
County, California.
14
Note 4 — Acquisitions (continued)
The following table presents the allocation of the aggregate purchase price:
|
|
|
|
|
|
|
Allocation at |
|
|
|
October 1, 2006 |
|
Prepaids and other current assets |
|
$ |
300,861 |
|
Supplies inventory |
|
|
395,162 |
|
Goodwill |
|
|
1,352,681 |
|
Accrued liabilities |
|
|
(2,048,704 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
On October 1, 2006 LPIH entered into an asset purchase agreement with VHS of Orange County, Inc.
Pursuant to the agreement LPIH acquired the operating assets and assumed certain current
liabilities from VHS of Orange County, Inc. The purchase price of $1,527,251 was paid through the
assumption of liabilities. The acquisition expands and compliments the operations of the Company in
Orange County, California.
The following table presents the allocation of the aggregate purchase price:
|
|
|
|
|
|
|
Allocation at |
|
|
|
October 1, 2006 |
|
Prepaids and other current assets |
|
$ |
24,698 |
|
Supplies inventory |
|
|
290,752 |
|
Goodwill |
|
|
1,211,801 |
|
Accrued liabilities |
|
|
(1,527,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
On October 1, 2006 WAMC entered into an asset purchase agreement with VHS of Anaheim, Inc.
Pursuant to the agreement WAMC acquired the operating assets and assumed certain current
liabilities from VHS of Anaheim, Inc. The purchase price of $2,667,653 was paid through the
assumption of liabilities. The acquisition expands and compliments the operations of the Company in
Orange County, California.
15
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Acquisitions (continued)
The following table presents the allocation of the aggregate purchase price:
|
|
|
|
|
|
|
Allocation at |
|
|
|
October 1, 2006 |
|
Prepaids and other current assets |
|
$ |
145,159 |
|
Supplies inventory |
|
|
416,311 |
|
Goodwill |
|
|
2,106,183 |
|
Accrued liabilities |
|
|
(2,667,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
On March 1, 2007 PVH entered into an asset purchase agreement with Adventist Health (“Adventist”).
Pursuant to the agreement PVH acquired the operating assets and assumed certain current liabilities
from Adventist. The purchase price of $28,000,000 consisted primarily of cash and was financed
through a sale lease back transaction (see Note 8). The acquisition expands the Company’s
operations into San Diego County, California.
The following table presents the allocation of the aggregate purchase price:
|
|
|
|
|
|
|
Allocation at |
|
|
|
March 1, 2007 |
|
Inventories |
|
$ |
500,000 |
|
Land |
|
|
10,160,000 |
|
Building and Land Improvements |
|
|
12,380,000 |
|
Equipment |
|
|
4,710,000 |
|
Other — Covenant not to Compete |
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,000,000 |
|
|
|
|
|
On November 2, 2007 CHMC entered into an asset purchase agreement with CFHS Holdings, Inc. (“CFHS”)
and Inglewood South Development Corp. (“ISDC”). Pursuant to the agreement CHMC acquired the
property and equipment and inventory of CFHS and ISDC. The purchase price of $55,762,000 consisted
primarily of cash and was financed
through a sale leaseback transaction (see Note 8). The acquisition expands the operations of the
Company into Western Los Angeles County.
16
Note 4 — Acquisitions (continued)
The following table presents the allocation of the aggregate purchase price:
|
|
|
|
|
|
|
Allocation at |
|
|
|
November 2, 2007 |
|
Inventories |
|
$ |
1,000,000 |
|
Land |
|
|
16,100,000 |
|
Building and Land Improvements |
|
|
31,833,000 |
|
Equipment |
|
|
6,829,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,762,000 |
|
|
|
|
|
Note 5 — Concentration of Credit Risk
Financial instruments which potentially subject the Company to significant concentrations
of credit risk consist primarily of cash. The Company maintains cash in bank deposit
accounts at high credit quality financial institutions. The balances, at times, may exceed
the $100,000 federally insured limit.
Patient accounts receivable at December 31, 2007 and 2006 are comprised of the following:
government programs, primarily Medicare 41% and 31%, respectively, Medi-Cal 24% and 25%,
respectively, healthcare maintenance and preferred provider organizations (managed care
programs) 4% and 16%, respectively, and private pay and commercial insurance patients 31%
and 28%, respectively. Management believes there is no credit risks associated with
receivables from government programs. Receivables from managed care programs and others
are from various payors who are subject to differing economic conditions and do not
represent concentrated risks to the Company. Management continually monitors and adjusts
the reserves associated with receivables, and does not require collateral. Losses due to
bad debts have been within management’s estimates.
17
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Property and Equipment
Property and equipment consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Land |
|
$ |
26,210,000 |
|
|
$ |
— |
|
Buildings |
|
|
51,383,935 |
|
|
|
519,917 |
|
Leasehold improvements |
|
|
5,460,712 |
|
|
|
4,206,170 |
|
Equipment |
|
|
68,757,631 |
|
|
|
39,294,764 |
|
Automobiles |
|
|
3,387,746 |
|
|
|
3,273,016 |
|
Construction in progress (estimated cost to complete
at December 31, 2007 is approximately $23,814,000) |
|
|
8,292,297 |
|
|
|
2,663,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,492,321 |
|
|
|
49,957,355 |
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization |
|
|
(26,825,848 |
) |
|
|
(18,985,161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
136,666,473 |
|
|
$ |
30,972,194 |
|
|
|
|
|
|
|
|
Gross property and equipment includes approximately $16,482,000 and $1,906,000 of equipment under
capital lease arrangements as of December 31, 2007 and 2006, respectively. Related accumulated
amortization totaled approximately $4,473,000 and $588,000 as of December 31, 2007 and 2006,
respectively.
18
Note 7 — Long-Term Debt
Long-term debt consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Line of credit with City National Bank, secured by accounts
receivable, interest payable monthly at an annual rate of prime
(7.25% at December 31, 2007), due July 1, 2008. |
|
$ |
7,000,000 |
|
|
$ |
6,000,000 |
|
|
|
|
|
|
|
|
|
|
Term loans with GE Commercial Finance, secured by various
equipment, payable in monthly installments ranging from
approximately $7,000 to $140,000 including interest at fixed
interest rates ranging from 6.63% to 7.44% per annum, maturing
in 2010. |
|
|
4,526,344 |
|
|
|
6,111,616 |
|
|
|
|
|
|
|
|
|
|
Term loan with City National Bank, secured by equipment,
interest payable monthly at an annual rate of prime (7.25% at
December 31, 2007), principal payable in monthly payments of
$116,667, maturing on August 1, 2010. |
|
|
5,093,450 |
|
|
|
6,493,450 |
|
|
|
|
|
|
|
|
|
|
Bank note payable, secured by certain real estate, bearing
interest at 5.75% per annum, payable in monthly payments of
$1,258, maturing in August 2024. |
|
|
154,903 |
|
|
|
160,457 |
|
|
|
|
|
|
|
|
|
|
Line of credit with Merrill Lynch, secured by accounts
receivable, interest payable monthly at an annual rate of LIBOR
+ 3% (8.38% at December 31, 2006), maturing in September 2008. |
|
|
— |
|
|
|
3,000,000 |
|
|
|
|
|
|
|
|
|
|
Note payable with City National Bank, secured by equipment,
bearing interest at LIBOR + 1.5% per annum (6.725% at December
31, 2007), principal payable in monthly payment of $34,377
starting September 1, 2007, maturing September 1, 2012. |
|
|
3,638,679 |
|
|
|
2,062,645 |
|
|
|
|
|
|
|
|
|
|
Note payable with Medical Properties Trust secured by certain
equipment and purchase options, bearing a fixed interest rate
of 10.77% per annum. Interest only payments due monthly,
principal balance due at maturity on December 30, 2020. |
|
|
5,000,000 |
|
|
|
— |
|
19
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — Long-Term Debt (continued)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Note payable with Medical Properties Trust secured by certain
equipment and purchase options, bearing a fixed interest rate
of 9.75% per annum. Interest only payments due monthly,
principal balance due at maturity on August 9, 2021. |
|
|
5,000,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Note payable with Medical Properties Trust secured by certain
equipment and purchase options, bearing a fixed interest rate
of 9.50% per annum. Interest only payments due monthly,
principal balance due at maturity on November 8, 2021. |
|
|
10,000,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Line of credit with Healthcare Finance Group (“HFG”), secured
by accounts receivable, interest payable monthly at an annual
rate of LIBOR + 1.50% (6.725% at December 31, 2007), maturing
in November 2009. |
|
|
12,360,880 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Line of credit with HFG, secured by accounts receivable,
interest payable monthly at an annual rate of LIBOR + 1.50%
(6.725% at December 31, 2007), maturing in December 2010. |
|
|
5,091,377 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Note payable with Medical Properties Trust secured by certain
property and equipment and lease deposits, bearing a fixed
interest rate of 9% per annum. Interest only payments due
monthly, principal balance due at matuity on May 8, 2022. |
|
|
25,000,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,865,633 |
|
|
|
23,828,168 |
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
(28,323,213 |
) |
|
|
(9,093,668 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,542,420 |
|
|
$ |
14,734,500 |
|
|
|
|
|
|
|
|
20
Note 7 — Long-Term Debt (continued)
Aggregate annual principal maturities of long-term debt for the five years subsequent to
December 31, 2007 are as follows:
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2008 |
|
$ |
28,323,213 |
|
2009 |
|
|
3,993,064 |
|
2010 |
|
|
3,179,666 |
|
2011
|
|
|
1,666,669 |
|
2012
|
|
|
582,133 |
|
Thereafter
|
|
|
45,120,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
82,865,633 |
|
|
|
|
|
|
In November 2007, the Company entered into a revolving loan agreement with HFG for an amount not to
exceed $10,000,000. Interest on the outstanding borrowings is payable monthly at an annual rate of
LIBOR plus 1.50%. The interest rate was 6.725% at December 31, 2007. The revolving loan is secured
by accounts receivable of PVH. Under the terms of the agreement, PVH is required to maintain
certain financial and non financial covenants. Management believes PVH was in compliance with loan
covenants as of December 31, 2007. As of December 31, 2007, approximately $4,908,000 was available
under this line of credit.
In December 2006, the Company entered into revolving loan agreements with HFG for three of its
subsidiaries in amounts not to exceed $7,000,000, $7,000,000 and $10,000,000, respectively.
Interest on the outstanding borrowings is payable monthly at an annual rate of LIBOR plus 1.50%.
The interest rate was 6.725% at December 31, 2007. The revolving loans are secured by accounts
receivable of the respective hospitals. Under the terms of the agreements, the respective
hospitals are required to maintain certain financial and non financial covenants. Management
believes the respective hospitals were in compliance with loan covenants as of December 31, 2007
and 2006. As of December 31, 2007, $1,946,101, $3,536,276 and $6,156,743, respectively was
available under these lines of credit.
Additionally the Company has other financial covenants with its other lenders all of which the
Company was in compliance with at December 31, 2007.
21
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Sales Lease-Back Liability
In May 2007 in connection with the acquisition of certain asset of Adventist (see Note 4)
PVH sold the real estate and related hospital building acquired from Adventist. As part of
the sale, PVH entered into a lease agreement to lease back the real estate and hospital
building (“leased property”) which expires in May 2012. The lease has an option to extend
the term of the lease for two additional five year periods. After ten years or at the end
of the lease term PVH has the option to purchase the lease property for $25,000,000. If at
the end of the lease term, including renewal terms, PVH does not exercise its option to
purchase the leased property, PVH must pay to the lessor a lease make up payment equal to
the difference between the then fair market value of the lease property and $25,000,000.
Due to the guarantee included in the lease, the sale was recognized as a finance obligation
under the provisions of SFAS No. 66, (“Accounting for Sales of Real Estate”). The proceeds
of $23,000,000 were recorded as a Sales lease-back liability on the consolidated balance
sheet as of December 31, 2007.
In November 2007 in connection with the acquisition of certain asset of CFHS (see Note 4)
CHMC sold the real estate and related hospital building acquired from CFHS. As part of the
sale, CHMC entered into a lease agreement to lease back the real estate and hospital
building (“leased property”) which expires in November 2012. The lease has an option to
extend the term of the lease for two additional five year periods. After ten years or at
the end of the lease term CHMC has the option to purchase the leased property for
$75,000,000. If at the end of the lease term, including renewal terms, CHMC does not
exercise its option to purchase the leased property, CHMC must pay to the lessor a lease
make up payment equal to the difference between the then fair market value of the leased
property and $75,000,000. Due to the guarantee included in the lease, the sale was
recognized as a finance obligation under the provisions of SFAS No. 66. The proceeds of
$75,000,000 were recorded as a Sales lease-back liability on the consolidated balance sheet
as of December 31, 2007.
Note 9 — Professional Liability and Workers Compensation Insurance
The Company has entered into an agreement with Desert Valley Insurance, LTD. (“DVIL”) and
ACE Insurance Company to provide workers’ compensation insurance coverage for the Company.
DVIL is affiliated with the Company through common ownership. Under the terms of the
agreement DVIL is obligated to insure each workers’ compensation claim up to a maximum of
$1,000,000 per claim. Losses in excess of $1,000,000 per claim are insured by ACE
Insurance Company.
22
Note 9 — Professional Liability and Workers Compensation Insurance (continued)
The Company also entered into an agreement with DVIL to provide medical malpractice
liability insurance on a claims-made basis. Under this policy, insurance premiums cover
only those claims actually reported during the policy term. Should the claims made policy
not be renewed or replaced with equivalent insurance, claims related to occurrences during
the policy term but reported subsequent to the policy’s termination may be uninsured. Under
the current policy the Company is covered up to a $3,000,000 per claim and $10,000,000
general aggregate limit with no amount deductible. The Company renewed its claims made
policy with DVIL for the next policy year ending December 31, 2008, under which the Company
will be covered up to a $1,000,000 per claim and $3,000,000 general aggregate limit with no
amount deductible. Excess losses up to an additional $7,000,000 will be insured by AIG
Insurance Company.
Accounting principles generally accepted in the United States of America require that a
health care facility recognize the estimated costs of malpractice claims in the period of
the incident of malpractice, if it is reasonably possible that liabilities may be incurred
and losses can be reasonably estimated. The Company recognized an estimated liability
based upon its claims experience to cover the Company’s potential exposure to incurred but
unreported claims. The claim reserve is based on the best data available to the Company;
however, the estimate is subject to a significant degree of inherent variability. The
estimate is continually monitored and reviewed, and as the reserve is adjusted, the
difference is reflected in current operations. Normal estimation differences between
amounts previously recorded resulted in a decrease in insurance expense of $2,242,571
during the year ended December 31, 2007. While the ultimate amount of professional
liability is dependent on future developments, management is of the opinion that the
associated liabilities recognized in the accompanying consolidated financial statements is
adequate to cover such claims. Management is aware of no potential professional liability
claims whose settlement, if any, would have a material adverse effect on the Company’s
consolidated financial position.
Due to the limitation of historical data on the entities recently acquired, the Company was
not able to estimate a liability based upon the historical claims experience to cover the
potential exposure of incurred but not reported liabilities. These entities were HBH,
LPIH, WAMC, PVH and CHMC.
The Company has evaluated whether they are required to consolidate DVIL in accordance with
FIN 46(R) as of December 31, 2007, and have determined that DVIL is not required to be
consolidated.
Note 10 — Leases
The Company leases certain equipment under various non-cancelable operating and capital
lease arrangements. Capital leases bear interest at rates ranging from 6.5% – 8.1%.
23
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Leases (continued)
On July 31, 2006 the Company entered into a non-cancelable operating lease for the MHMC
hospital facility which expires July 31, 2021. The Company has an option to extend the term
of the lease for three additional periods of five years each. The lease provides for a
monthly base rent of $162,500, which is adjusted annually based on the greater of 2% or
consumer price index.
On November 8, 2006 the Company entered into non-cancelable operating leases for HBH, LPIH
and WAMC hospital facilities which expire November 8, 2021. These leases have an option to
extend the term of the lease for three additional periods of five years each. The lease
provides for a monthly base rent ranging from $98,900 to $197,900, which is adjusted
annually based on the greater of 2% or consumer price index.
On February 12, 2007, the Company entered into a lease agreement with Prime A Investment
LLC (“Prime A”), a related party under common ownership, to lease the DVH hospital building
and land. The initial lease term is 180 months (15 years). The lease provides for a monthly
base rent of $525,000, which is adjusted annually based on the greater of 2% or the
consumer price index.
On March 1, 2007, the Company entered into a lease agreement with Prime A to lease the CVMC
hospital building and land. The initial lease term is 180 months (15 years). The lease
provides for a monthly base rent of $375,000, which is adjusted annually based on the
greater of 2% or the consumer price index.
Lease expense, consisting primarily of building rent and equipment leases, amounted to
approximately $32,709,000 and $19,063,000 for the years ended December 31, 2007 and 2006
respectively.
24
Note 10 — Leases (continued)
Future minimum lease payments under non-cancelable operating leases (with initial or
remaining lease terms in excess of one year) and future minimum capital lease payments as
of December 31, 2007 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
|
Capital |
|
|
Lease |
|
Years ending December 31, |
|
Leases |
|
|
Commitments |
|
2008 |
|
$ |
3,728,009 |
|
|
$ |
30,456,939 |
|
2009 |
|
|
3,632,667 |
|
|
|
28,642,133 |
|
2010 |
|
|
3,578,092 |
|
|
|
26,592,257 |
|
2011 |
|
|
3,447,411 |
|
|
|
25,534,283 |
|
2012 |
|
|
3,237,080 |
|
|
|
25,422,835 |
|
Thereafter |
|
|
— |
|
|
|
234,418,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
17,623,259 |
|
|
$ |
371,067,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest |
|
|
(2,444,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,179,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
(2,942,322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,236,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
25
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Related Party Transactions
Notes receivable from related parties as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Notes receivable from Action Collection, unsecured,
non interest bearing, due on demand. |
|
$ |
3,922 |
|
|
$ |
3,561 |
|
|
|
|
|
|
|
|
|
|
Short term unsecured advances to employees, non
interest bearing, due on demand |
|
|
127,757 |
|
|
|
272,169 |
|
|
|
|
|
|
|
|
|
|
Receivable from DVIL, related to expenses incurred in
excess of deductibles. |
|
|
492,388 |
|
|
|
433,080 |
|
|
|
|
|
|
|
|
|
|
Notes receivable from Prime A, unsecured, non interest
bearing, due on demand. |
|
|
35,762,558 |
|
|
|
9,241,612 |
|
|
|
|
|
|
|
|
|
|
Various |
|
|
5,940 |
|
|
|
11,813 |
|
|
|
|
|
|
|
|
|
|
Less: notes receivable from Prime A classified as
contra-equity. |
|
|
(35,762,558 |
) |
|
|
(9,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
630,007 |
|
|
$ |
962,235 |
|
|
|
|
|
|
|
|
26
Note 11 — Related Party Transactions (continued)
Notes payable to related parties as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Notes payable to stockholder, unsecured, bearing
interest at 7.25% as of December 31, 2007, payable on
demand. |
|
$ |
9,000,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Notes payable to Prime A, unsecured, non interest
bearing, payable on demand. |
|
|
317,668 |
|
|
|
5,133,463 |
|
|
|
|
|
|
|
|
|
|
Payable to DVIL, related to the financing of insurnce
premiums. |
|
|
— |
|
|
|
273,535 |
|
|
|
|
|
|
|
|
|
|
Notes payable to Action Collection, unsecured, non
interest bearing, due on demand. |
|
|
355,503 |
|
|
|
168,413 |
|
|
|
|
|
|
|
|
|
|
Various |
|
|
— |
|
|
|
94,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,673,171 |
|
|
$ |
5,669,785 |
|
|
|
|
|
|
|
|
The Company uses the services of Action Collection, a related party collection agency to collect
delinquent patient accounts receivable. For the years ended December 31, 2007 and 2006, agency
fees paid to the related party totaled $2,661,348 and $2,009,581, respectively.
The Company entered into agreements with DVIL to provide workers’ compensation insurance coverage
and commercial malpractice liability insurance on a claims-made basis (see Note 9). Insurance
premiums paid to DVIL totaled $25,056,689 and $33,421,594 for the years ended December 31, 2007 and
2006, respectively. The Company gets reimbursement from DVIL for workers’ compensation insurance
deductibles paid on behalf of DVIL.
The Company leases certain office buildings and parking facilities from Prime A. The leases are for
five year terms. Rent expense incurred under these leases was $1,247,851 and $985,025 for the years
ended December 31, 2007 and 2006, respectively.
During 2007, the Company entered into agreements with Prime A to lease the hospital buildings and
land at DVH and CVMC. The leases are for 15 year terms (see Note 10). Rent expense incurred under
these leases totaled approximately $9,874,000 for the year ended December 31, 2007.
27
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Related Party Transactions (continued)
The Company purchased medical supplies from a related party within the normal course of business.
The related pharmaceutical company was sold to an unrelated party in June 2006. For the years ended
December 31, 2006, medical supplies purchased from the related party totaled $309,035.
During 2007, the Company advanced $35,463,745 to Prime A of which substantially all was funded
directly from the lender Medical Properties Trust (see Note 7). The advances are unsecured, due on
demand and bear no interest. For financial reporting purposes the advances are being reflected as a
reduction in stockholders’ equity.
During 2006, the Company advanced $9,000,000 to its chief executive officer and stockholder. The
advances are unsecured, due on demand and bear interest at 6% per annum. For financial reporting
purposes the advances are being reflected as a reduction in stockholders’ equity. These advances
were paid back to the Company in 2007.
Note 12 — Retirement Savings Plan
The Company has a defined contribution pension plan covering substantially all of its
employees. The Company’s contribution to the plan is at the Company’s discretion but
limited to the maximum amount deductible for federal income tax purposes under the
applicable Internal Revenue Code. During the years ended December 31, 2007 and 2006, the
Company made contributions of $1,569,334 and $797,168, respectively, to the plan.
Note 13 — Contingencies
The Company is aware of certain asserted and unasserted legal claims arising in the normal
course of business. While the outcome cannot be determined at this time, it is management’s
opinion that the liability, if any, from these actions will not have a material adverse
effect on the Company’s financial position.
28
Note 13 — Contingencies (continued)
The health care industry is subject to numerous laws and regulations of federal, state, and
local governments. Compliance with such laws and regulations can be subject to future
government review and interpretation, as well as regulatory actions unknown or unasserted
at this time. These laws and regulations include, but are not
limited to, accreditation, licensure, and government health care program participation
requirements, reimbursement for patient services, and Medicare and Medicaid fraud and
abuse. Recently, government activity has increased with respect to investigations and
allegations concerning possible violations of fraud and abuse statutes and regulations by
health care providers. Violations of these laws and regulations could result in exclusion
from government health care program participation, together with the imposition of
significant fines and penalties, as well as significant repayment for past reimbursement
for patient services received. While the Company is subject to similar regulatory review,
there are no reviews currently underway and management believes that the outcome of any
potential regulatory review will not have a material adverse effect on the Company’s
financial position.
Management believes that the Company is in compliance with government laws and regulations
related to fraud and abuse and other applicable areas. While no material regulatory
inquiries have been made, compliance with such laws and regulations can be subject to
future governmental review and interpretation, as well as regulatory actions unknown or
unasserted at this time.
Note 14 — Legislation
The Health Insurance Portability and Accountability Act (HIPAA) was enacted on August 21,
1996, to assure health insurance portability, reduce health care fraud and abuse, guarantee
security and privacy of health information and enforce standards for health information.
Organizations were required to be in compliance with certain HIPAA privacy provisions
beginning April 2003. Organizations are subject to significant fines and penalties if found
not to be compliant with the provisions outlined in the regulations. Management believes
that the Company is in compliance with HIPAA.
29
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Income taxes
The components of the provision (benefit) for income taxes for the years ended December 31,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Current |
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
1,249,091 |
|
|
|
64,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,249,091 |
|
|
|
64,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred expense |
|
|
|
|
|
|
|
|
Federal |
|
$ |
— |
|
|
$ |
(2,497,300 |
) |
State |
|
|
— |
|
|
|
(440,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
(2,938,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,249,091 |
|
|
$ |
(2,873,479 |
) |
|
|
|
|
|
|
|
The income tax benefit for the year ended December 31, 2006 is the result of the Company’s
change in corporate status from Subchapter C to Subchapter S of the Internal Revenue Code
(see Note 2).
Note 16 — Proceedings Under Chapter 11
On June 30, 2005 the bankruptcy court approved CVMC’s plan of reorganization from Chapter
11 bankruptcy. Pursuant to the plan CVMC will make payments in full to all creditors with
approved pre-petition claims and consummate the plan through its continued operations.
The accounts of CVMC included pre-petition liabilities of $1,219,450 as of December 31,
2006. These liabilities were extinguished during 2007. Pre-petition liabilities included
claims that are expected to be settled as part of the plan of reorganization. Pre-petition
liabilities consisted primarily of trade accounts payable to unsecured creditors.
Gain on extinguishment of debt of $0 and $104,447 for the years ended December 31, 2007 and
2006, respectively, represents pre-petition claims that have been discharged by the
bankruptcy court or reductions in pre-petition claims resulting from settlement agreements
between CVMC and the creditors.
30
Note 17 — Discontinued Operations
On April 19, 2007, AVSC entered into an Asset Purchase Agreement (“Agreement”) with St.
Mary Medical Center to sell its assets with the exception of Cash and Accounts Receivable.
The revenue and operating expenses attributable to AVSC for the years ended December 31,
2007 and 2006 are reported separately in the consolidated statements of income under
discontinued operations. Revenues, income before income taxes, income tax expenses, and net
income (loss) generated by this discontinued operation prior to its disposition were as
follows for the years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Revenues |
|
$ |
303,801 |
|
|
$ |
931,829 |
|
Income (loss) before income taxes |
|
|
216,088 |
|
|
|
(377,343 |
) |
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
$ |
216,088 |
|
|
$ |
(377,343 |
) |
|
|
|
|
|
|
|
Assets and liabilities associated with the AVSC as of December 31, 2007 and 2006 have been
segregated from continuing operations and presented as assets and liabilities of discontinued
operations in the consolidated balance sheets. Assets and liabilities of the discontinued
operations as of December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
145,220 |
|
|
$ |
240,670 |
|
Property and equipment, net |
|
|
— |
|
|
|
73,071 |
|
Current liabilities |
|
|
(417 |
) |
|
|
(35,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets of discontinued operations |
|
$ |
144,803 |
|
|
$ |
278,714 |
|
|
|
|
|
|
|
|
Note 18 — Subsequent Events
On April 7, 2008, the Company entered into an Asset Sale Agreement with Amisub of
California, Inc., and AMI/HTI Tarzana Joint Venture pursuant to which the Company agreed to
acquire the real property and assets comprising the Encino Campus of the Encino Tarzana
Regional Medical Center for a purchase price of $9 Million. The transaction contemplated by
the Asset Sale Agreement was consummated on June 1, 2008.
31
PRIME HEALTHCARE SERVICES, INC.
AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18 — Subsequent Events (continued)
On May 13, 2008, the Company entered into an Asset Sale Agreement with Medical Center of
Garden Grove, San Dimas Community Hospital, Eastern Professional Properties, and Tenet
HealthSystem Medical, Inc., pursuant to which the Company agreed to acquire Garden Grove
Hospital & Medical Center and San Dimas Community Hospital as well as adjacent medical
office buildings at both hospitals
for $40,500,000. The transaction contemplated by the Asset Sale Agreement was consummated
on July 1, 2008.
32